The State Pension Fund of Finland

The State Pension Fund of Finland (VER) was established in 1990 to balance state pension expenditure. VER invests pension assets and helps the state to prepare for financing future pensions. VER is a long-term investor characterised by a high standard of professionalism and an ethical code of conduct. VER operates as part of the prefunded Finnish pension system.

Annual Reports

Four scenarios for the crisis

2020-04-17 at 9:24Timo Löyttyniemi

We have been watching the spread of the coronavirus in amazement and following the massive measures being implemented to counter it. Decision-making has focused on human health, hospital capacity, intensive care and the number of deaths. Public confidence in the projections made by the health authorities has been high, and they have played a key role in decision-making. At the same time, there has been remarkable uncertainty as to what we know and what we don’t. To understand what may happen in the economy and the marketplace, the following four scenarios could prove useful.

Scenario 1: MIRACLE

In the Miracle scenario, the coronavirus will be beaten with a vaccine or it will disappear as a result of natural debilitation in a matter of months. Such a miracle would permit fast economic recovery. Social interaction would be quickly restored and demand for restaurant and travel services would pick up. Getting a vaccine on the market in a short time would be nothing short of a miracle. The Miracle scenario could also materialise if the virus had a natural tendency to become less aggressive or if it were weakened by favourable weather conditions.

The Miracle scenario would mean that the words of President Trump ”One day, it’s like a miracle, it will disappear” (27 Feb 2020) would come true and everything would soon be business as usual. For the economy and markets, it would mean a V-shaped recovery.

Scenario 2: EFFECTIVE TREATMENT

If materialised, the Effective Treatment scenario would mean the discovery of a medical cure. It would reduce the need for hospital and intensive care, thereby eliminating one bottleneck in the clinical pathway. While such treatment would not prevent infections, it would protect those infected from the worst complications. There have been speculations in the media that such a treatment could be revolutionary. However, it appears that we do not know enough about potential effective treatments, and some of the information being circulated has been disputed by experts. When talking about a certain treatment, President Trump said that it was “a game changer” (19 March 2020). So far, we have seen nothing of the sort.

Scenario 3: BASELINE

In the Baseline Scenario, the coronavirus would continue to cause a range of disruptions of varying intensity until a vaccine was discovered. It is speculated that a vaccine could be found in about a year. Such quick progress is possible because numerous research teams are engaged in persistent efforts to work out a solution and bring the project to a successful conclusion. Conceivably, a vaccine could be available one year from now, in 2021. Should this happen, it would mean that the coronavirus would remain a threat until then. It could pose a risk locally or globally or appear in bursts or pervasively in its current or some mutated form. Many countries would probably employ the best technology, engage in active testing and monitor the chains of transmission. Despite these best efforts, people would remain cautious and show restraint until a new vaccine was made available. As a result, the economy and equity markets would split into two. Some sectors would benefit from the situation, or at least be able to cope with it, whereas others would face long-term problems. At least the restaurant and travel industries would be not able to transform quickly enough.

The massive support packages put together by states and central banks in March 2020 would be followed by further measures. Socially and economically, the price of maintaining the previous standard of living would be high, if not unsustainable. Hard choices would have to be made throughout the year. Efforts to maintain liquidity would be replaced by risk sharing. The step from sending benefits to collecting taxes would be short. Sovereign debt could be increased through central bank asset purchases, but it would not be possible to postpone taxes for long.

Overall, the Baseline Scenario would mean that the economy and markets would follow a W-shaped curve throughout 2020. Comfort and confidence in the future would be provided by the expectation of an effective vaccine. These expectations would be reflected at least in the stock markets even if an economic recovery were not to materialise at this point.

Scenario 4: DEPRESSION

If the coronavirus continues to beset us and no vaccine is found, we may be in for a prolonged recession. Global impacts combined with cautious consumer behaviour would mean that the world will not be the same again. A lot of things would change for good. People’s behaviour patterns would change, and the economy would adjust. Economic growth would stall and the mood in the stock market would become apprehensive.

New letters to symbolise the development of the economy and markets

The above scenarios are not mutually exclusive, at least not completely. They may overlap or materialise in succession. One day, people and markets may believe in one scenario and the next day, in another. At the same time, new letters are being adopted to illustrate economic and market developments.

With a prolonged crisis, V-shaped scenarios for economic recovery will, at best, be transformed into U-shaped projections, even if a miracle were to take place. If the crisis becomes protracted, the most probable scenario is a W-shaped development in the choppy seas of the virus and the efforts to stimulate the economy. The letter W describing the Baseline Scenario could sway either way in between pessimism and optimism. Nobody wants to believe in an L-shaped curve of a depression. The world can do better. The actions taken by governments and central banks will have an impact, and private enterprises will see us through.